New Delhi, Mar 23
India is believed to have challenged in a court in The Hague an arbitration tribunal verdict that overturned its demand for Rs 10,247 crore in back taxes from Cairn Energy Plc—the second time in three months that it has refused to accept an international award against retrospective tax.
The appeal was filed on Monday, a source with knowledge of the matter said.
The Finance Ministry spokesperson did not immediately respond to an e-mail sent for comments.
The appeal against a three-member tribunal at the Permanent Court of Arbitration at The Hague invalidating India’s Rs 10,247 crore tax claim on Cairn Energy and ordering the government to return the value of shares it had sold, dividends seized and tax refunds withheld, comes weeks before UK Prime Minister Boris Johnson’s visit to India.
The British Prime Minister is widely expected to broach India honouring international arbitration awards during his April 26 visit, another source said.
In December, the government had challenged in a Singapore court an international arbitration tribunal verdict that overturned its demand for Rs 22,100 crore in back taxes from Vodafone Group Plc.
Since the seat of Vodafone arbitration was Singapore, an appeal was filed in a court in that country. In the case of Cairn, the seat was The Hague and so an appeal has been filed in a court in the Netherlands, the first source said.
The appeal was filed on a day when Minister of State for Finance Anurag Singh Thakur had told the Lok Sabha in a written reply that “any such decision on filing of appeal or otherwise is taken only after careful consideration of all aspects of the matter.”
The tribunal’s 582-page detailed verdict that asked India to return USD 1.2 billion-plus interest and cost to Cairn was registered in the Netherlands on January 8 and New Delhi acknowledged it on January 19, the source said.
Finance Minister Nirmala Sitharaman had earlier this month indicated the government’s intent of appealing against the award on grounds of it questioning the sovereign powers of India to levy taxes.
Her ministry feels taxation is not a subject of bilateral investment treaties, like the UK-India Bilateral Investment Treaty under which Cairn had sought rescinding of the tax demand raised, and so the award should be appealed.
It is of the opinion that Cairn set up a tax abusive structure in 2006 when it reorganised its India business to list the local unit, and did not pay taxes anywhere in the world on the gains that it made in India, they said, adding India had made an unsuccessful case of tax not being part of the treaty before the arbitration panel as well.
However, the arbitration award specifically made it clear the base of the judgment was not a challenge to the 2012 law or India’s sovereign right to tax.
“The issue at stake is thus not a matter of domestic tax law, it is rather whether the fiscal measures taken by the state, valid or not under its own tax laws, violate international law,” the tribunal had said in a unanimous verdict.
The Hague panel found that a 2012 law passed by the Indian Parliament was a new tax, not a clarification of prior law that could be applied to earlier years.
Cairn has moved courts in nine countries to enforce the award against India. The award has already been recognised by courts in the US, the UK, Netherlands, Canada and France and the same is in the process in Singapore, Japan, the United Arab Emirates and the Cayman Islands.
The registration of the award is the first step towards its enforcement in the event of the government not paying the firm.
Once the court recognises an arbitration award, the company can then petition it for seizing any Indian government assets such as bank accounts, payments to state-owned entities, airplanes and ships in those jurisdictions, to recover the monies due to it, sources said.
Sources said the government believes that taxation is not covered under investment protection treaties with various countries and the law on taxation is a sovereign right of the country. While the treaties are primarily aimed at the protection of investments, the tax is levied on ‘returns’ earned by entities.
But the Hague tribunal had gone into this claim and rejected it.
Vodafone had challenged before the arbitration tribunal the demand for Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT).
The demand pertained to Vodafone’s USD 11-billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchison Whampoa in 2007.
